CP Rail CEO says unlikely to pursue hostile bid for CSX

TORONTO (Reuters) - Canadian Pacific Railway Ltd (CP.TO) is still open to a merger with one of the two bigger eastern U.S. carriers even after talks with CSX Corp CSX.N failed, though a hostile bid is unlikely, Chief Executive Hunter Harrison said on Thursday.

CP, Canada's No.2 railway with extensive operations in the U.S., said on Monday it ended merger talks with CSX. Harrison says creating a new transcontinental railroad could improve congestion around Chicago, where east- and west-based railways meet and hand off cargo, a process that can take days.

"We had some fascinating conversations about the potential, but it became evident that we saw the world a little differently, which is fine," Harrison, 69, told a conference call on Tuesday after CP reported higher third-quarter earnings and revenue that fell short of analysts' expectations.

Any deal between CP and CSX, the No. 3 U.S. railway, would likely have faced tough regulatory barriers and alarmed customers. Norfolk Southern Corp (NSC.N) is the other of the two bigger U.S. railways based east of Chicago.

Asked if any combination would need to be friendly, Harrison said: "I've learned never say never, but I can't contemplate any kind of hostile activity."

Without mentioning Norfolk Southern by name, Harrison said CP had looked at the two eastern carriers and one had come out slightly ahead. He said CP is not currently focusing on another deal, though if something comes up he would look at it.

Harrison said a deal with one of the western "big boys" was less likely. Berkshire Hathaway Inc's (BRKa.N) Burlington Northern Santa Fe and Union Pacific Corp (UNP.N) have the biggest networks in the western United States. He also said Kansas City Southern (KSU.N), the smallest of the major railways, is "very expensive."

Net income at CP rose to C$400 million ($356 million), or C$2.31 a share, from C$324 million, or C$1.84, a year earlier, the railway said on Tuesday. Revenue rose 9 percent to C$1.67 billion.

Analysts, on average, had expected earnings of C$2.39 on revenue of C$1.7 billion, according to Thomson Reuters I/B/E/S. Stock-based compensation weighed on earnings, CP said. The company's stock was up nearly 40 percent for the year at Monday's close. They traded at $224.58 later on Tuesday, up 1.32 percent from the previous close.

"In general, we believe these results are largely in line with our forecast. We suspect the consensus estimates did not fully reflect the headwind from elevated stock-based compensation," said BMO Capital Markets analyst Fadi Chamoun in a note to clients.

The railway's operating ratio improved 310 basis points to 62.8 percent. The ratio expresses operating expenses as a percentage of revenue, so lower numbers are better.

When Harrison took over CP in 2012 he vowed to bring the ratio down to 65 percent by mid-2016, but it actually hit 65.1 percent in the second quarter of this year.